VIX, FX and Rates

Client Talking Points

VIX

Does an explicitly more dovish Fed tone down short-term volatility here? Our risk range model actually implies it could as the top-end of our range on front-month VIX no longer has a 4-handle in front of it (range still elevated, but 22-36).

FOREIGN CURRENCY

Down Dollar = Up Yen = Nikkei Down (another -2.4% overnight), so not everyone is a winner. Risk ranges are narrowing though as volatility across asset classes does this morning (risk range for EUR/USD narrows to $1.10-1.14).

RATES

UST 10YR dropped to 2.11% on the slowest rate of change in Non-Farm Payrolls since the Labor Cycle gains peaked in FEB, then back up this morning to 2.15% with Spanish 10YR +7 basis points approaching parity with UST at 2.14%.

**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE.

Asset Allocation

CASH

68%

US EQUITIES

0%

INTL EQUITIES

0%

COMMODITIES

4%

FIXED INCOME

28%

INTL CURRENCIES

0%

Top Long Ideas

Company

Ticker

Sector

Duration

MCD

The franchisees voted YES on the proposal to launch All Day Breakfast nationwide at all 14,318 U.S. locations. This is a very important, monumental move by CEO Steve Easterbrook. It will define his legacy as the CEO that changed McDonald's (and the rest of the industry) for many years to come. In 2016, if MCD (with all day breakfast and an improved value message) can drive same-store sales up by 5%, the system will generate $1.9bn in incremental system-wide sales.

As noted in our survey we released on July 27th, it is evident that All Day Breakfast (ADB) will be a game changer for the company. Breakfast is the single most requested item by McDonald’s customers. Listening to the customer is a tried and true way to succeed.

PENN

Following our recent visit to Plainridge and meetings with senior management, we reiterate our positive Penn National Gaming thesis. Stability in regional markets provides good earnings visibility while expected strong contributions from Plainridge and Jamul next year should provide a nice 2 year growth story.

Regional gaming likely cooled off in August following a strong July. While that could provide some consternation as the states begin releasing August gaming revenues later this week, the YoY slowdown is more related to quantitative factors rather than the health of the regional gaming customer. September should quickly provide evidence of that.

TLT

The labor market peaks late cycle and the trend in key employment data suggest things are going from great to good (marginal changes matter). The ADP employment report showed a sequential acceleration, printing +190K vs. +185K in July. But to be clear, this series peaked at over +200K additions in the first couple of months of 2015. Initial jobless claims bottomed about six weeks ago. The trend in that series is moving back to the all-important 300K level. While the headline NFP number was a bomb on Friday, printing +173K for Aug. vs. estimates for +215K, the trend is also turning. This series also peaked back in February on a YoY rate-of-change basis.

Why do we point to all of this growth-slowing data? Because it’s meaningful.

As we have mentioned repeatedly Central Banks take a reactionary policy response to the data. The market is becoming more efficient at getting in front of policy the longer we venture into this modern-day central policy experiment

When forward-looking growth expectations are taken down, the back end of the Treasury curve flattens (this is good for TLT and EDV)

In reaction to more dovish policy monetary policy measures, the market likes gold over dollars coming out of central policy events

Three for the Road

TWEET OF THE DAY

I don't chase - our call was to cover the Transports $IYT and some shorts on Friday's red

@KeithMcCullough

QUOTE OF THE DAY

The essential part of creativity is not being afraid to fail.

Edwin H. Land

STAT OF THE DAY

On average, deciding to fly Spirit added 11 minutes to a person’s total flight time between July 2014 and June 2015.

09/08/15 08:01 AM EDT

September 8, 2015

BULLISH TRENDS

BEARISH TRENDS

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09/08/15 07:46 AM EDT

The Macro Show Replay | September 8, 2015

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the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

CHART OF THE DAY: The Latest of #LateCycle U.S. Economic Indicators

Editor's Note: The following chart and excerpt are from this morning's Early Look written by Hedgeye CEO Keith McCullough. If you're looking for a dynamic way to to get ahead of anemic consensus groupthink each morning click here to learn more.

* * *

...While we won’t be sure until we move out further in time, with every US Jobs Report we’re becoming more sure that the peak in the latest of #LateCycle US economic indicators peaked when the cycle did.

As you can see in today’s Chart of The Day (with my doodles):

The peak (year-over-year rate of change) in both non-farm and private payroll growth was in FEB 2015

Non-farm (NFP) payrolls have slowed from 2.34% in FEB to a YTD low of 2.09% in AUG

In that excerpt in particular, Klein was analyzing the decision making #process of firefighters who “build up patterns that apply in making rapid decisions in emergencies.”

“Firefighters often changed their beliefs about a complex fire as they learned more details… surprises forced them to rethink what was going on and replace erroneous beliefs.” (pg 27) Is that how you risk manage non-linear market and economic risks? I do.

Back to the Global Macro Grind…

Maybe I learned about macro risk management from my Dad (firefighter for 38 years) – maybe I just had enough humility to learn it from Mr. Macro Market himself. Like in most things macro, I should never be sure.

While we won’t be sure until we move out further in time, with every US Jobs Report we’re becoming more sure that the peak in the latest of #LateCycle US economic indicators peaked when the cycle did.

As you can see in today’s Chart of The Day (with my doodles):

The peak (year-over-year rate of change) in both non-farm and private payroll growth was in FEB 2015

Non-farm (NFP) payrolls have slowed from 2.34% in FEB to a YTD low of 2.09% in AUG

Private payroll growth has slowed from 2.71% in FEB to 2.37% in AUG

But, but – there are no buts. Until enough people believe that “it’s different this time,” the recent #history of the US Labor Cycle slowing is what it is. Alongside slowing Growth, Inflation, and Revenues/Earnings – it’s all part of the #LateCycle slowing, ex-“China.”

The good news about this is that some of it is being priced in. On Friday’s print, US stocks (SP500) dropped -1.5% and the UST 10yr Yield fell to 2.11%. Despite both “bouncing” (again) this morning, that is what it is now too.

On the pricing in of it all, here are some things to consider when contextualizing your next series of decisions:

SP500 was down -3.4% last week, taking its 1-month drop to -8.2% and draw-down from the all-time high to -9.8%

The US Dollar (Index) was up then down to end last week and has lost -1.7% of its value in the last month

At 2.12%, the 10yr UST yield dropped 6 basis points (bps) last wk and is down -10 basis points in the last month

US 5yr Break-Evens (inflation expectations) fell another -10bps last wk (-17bps in the last month) to 1.16%

In other words, that’s what it means when both GROWTH and INFLATION are starting to (not finished) price in the slowing. In classic #LateCycle form, as the data slows, the US Dollar’s gains have alongside falling interest rates.

Futures and Options positioning is becoming quite bearish on growth and inflation too. Here’s the update on CFTC non-commercial net LONG and SHORT positions:

EURO net SHORT position is at one of its least bearish positions in a year at -59,691 contracts

YEN net SHORT position fell to its lowest of 2015 at -20,994 contracts

What you can see here is a relatively new pattern of big macro players putting on a collectively bearish bet on both US growth and the currency appreciation expectations that used to be built into a June “rate hike.”

Now that June has come and gone, the doves are starting to cry at the Federal Reserve about September. This morning’s @WSJ update has a Fed voting member who was relatively hawkish (San Francisco Fed Head, Williams) going dovish too.

From NY Fed Head, Bill Dudley, to the West Coast’s Williams what you can also see here is a new pattern of the Fed becoming concerned about a “falling stock market” (Williams’ words, not mine).

If the Fed just says “NO SEP HIKE”, will that clarity perpetuate less short-term volatility in both FICC (Fixed Income, Currencies, and Commodities) and Global Equities? I think it might.

And the only reason why I think that is because my front-runner (my risk range process) is finally signaling tighter ranges in not only rates this morning, but the EUR/USD pair and, to a relative degree, the SP500.

Is that a signal or noise? Intuition or insight? I’m not sure. I rarely get more sure until the market opens and I can risk manage the fire, in real-time.

DIN | Announced strategic plan to consolidate operations at its Glendale, CA location, intended to improve organizational speed and effectiveness. They are expecting pre-tax charges of $3mm in FY15 and $10mm in FY16 (click here for article)

FOGO | Will open five new restaurants in the United States, this is all part of their effort to increase company-owned restaurant count by 10% per year. The new locations will be in Summerlin, NV, Woodlands, TX, San Francisco, CA, Naperville, IL and New Orleans, LA (click here for article)

CMG | Lawsuit challenges Chipotle’s G.M.O. claims, claiming that the meat products come from animals which feed on G.M.O. corn and soy. Chipotle has said little except for that they intend to fight the suit (click here for article)

Tuesday, September 1

MCD | Announced all day breakfast will be nationally launched at all locations on October 6th (click here for Hedgeye note)

BOBE | The company along with its external advisors have decided that performing a sale-leaseback transaction of up to $200mm is the most appropriate path to enhancing shareholder value (click here for article)

SHAK | Announced the first Tokyo Shack will open this winter in Meiji-Jing Gaien park (click here for article)

SECTOR PERFORMANCE

Casual Dining and Quick Service stocks that we follow widely outperformed the XLY last week. The XLY was down -2.3%, top performers on a relative basis from casual dining were BOBE and RT posting an increase of +5.7% and +4.9%, respectively, while GMCR and ARCO led the quick service group this week up +10.2% and +5.1%, respectively.

QUANTITATIVE SETUP

From a quantitative perspective, the XLY looks bearish from a TRADE and TREND perspective, TRADE support is 71.09.

CASUAL DINING RESTAURANTS

QUICK SERVICE RESTAURANTS

RESTAURANT PERFORMANCE INDEX

Restaurant performance index capital expenditures have been accelerating due an increase number of IPO’s and restaurant expansion across the country.

Keith’s Three Morning Bullets

Dovish Fed article out of @WSJ as another wanna be hawk (Williams) fades alongside stocks:

VIX – does an explicitly more dovish Fed tone down short-term volatility here? My risk range model actually implies it could as the top-end of my range on front-month VIX no longer has a 4-handle in front of it (range still elevated, but 22-36)

FX – Down Dollar = Up Yen = Nikkei Down (another -2.4% overnight), so not everyone is a winner; risk ranges are narrowing though as volatility across asset classes does this am (risk range for EUR/USD narrows to $1.10-1.14)

RATES – UST 10yr dropped to 2.11% on the slowest rate of change in Non-Farm Payrolls since the Labor Cycle gains peaked in FEB, then back up this morning to 2.15% with Spanish 10yr +7bps approaching parity w/ UST at 2.14%

SPX immediate-term risk range = 1; UST 10yr 2.07-2.19%

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst

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